Professional Documents
Culture Documents
GUIDELINES FOR
Acronyms
& Abbreviations
AGM Annual General Meeting
Contents
Acronyms and Abbreviations 3
Introduction 5
Objectives of the Guidelines 6
SEP Performance Management System 7
Institutional context for performance management 8
Audience for the Guidelines 14
Sources 14
Chapter 1
Rationale for establishing a Performance Management System for SEPs 16
International context 17
Zimbabwe Context 20
Chapter 2
Establishing SEP performance indicators and setting targets linked to strategy 22
Performance indicators and KPIs cascade from SEP strategy 22
Financial performance indicators 28
Economic, social and governance (non- financial) performance indicators 29
Integrated reporting and KPIs 36
Performance indicators and targets linked to strategy 39
Establishing performance indicators and setting targets that work 43
Chapter 3
Establishing and review of KPIs 34
Establishing KPIs and setting targets for senior management 45
Reviewing individual performance of senior management 49
Reviewing individual SEP performance 52
Chapter 4
Structuring and monitoring performance agreements 54
Performance agreements between government and SEP Boards 55
Negotiating performance agreements between government and SEP boards 56
Monitoring performance agreements between government and SEP boards 57
Performance agreements/contracts for senior management 57
Structuring performance agreements for senior management 58
Monitoring performance agreements/contracts for senior management 58
Common problems with performance contracts 59
Guide to creating a performance agreement 59
Board and senior management remuneration guidelines 61
Annex 62
5
Introduction
6
SEPs are assets owned by the state on behalf of the public. In terms
of the Constitution of Zimbabwe, state controlled commercial entities
are expected to maintain commercial viability and adopt generally
accepted standards of good corporate governance in their operations.
Ensuring they create value for society through effective professional and transparent management and
oversight is critical to good public accountability and a precondition for creating public trust in the
state. Additionally, it is generally acknowledged that adoption of sound corporate governance practices
contributes to SEPs enhancing their performance and viability. Sound SEP Performance Management
systems are one of the ways to improve corporate governance practices of SEPs and they contribute
to improved SEP performance. By the same token, there is increasing recognition that poor corporate
governance practices in SEPs significantly contribute to their underperformance.
Evidence from many countries demonstrates that effective SEP performance management can lead
to improved financial and non-financial performance. A strong SEP performance management system
sets objectives and targets that provide clarity to SEP boards and management on the expectations
of government as owner. Clear goals, accompanied by accountability, transparency and high quality
reporting and disclosure requirements, establish a framework in which the SEP board can set and
execute strategy while providing government with sufficient assurance that the SEP will be held
accountable for its performance.
A 2016 Survey of SEPs to assess the level of awareness of, and compliance with, existing corporate governance
requirements revealed that most SEPs did not have any effective performance management systems in place,
and where such systems did exist, they were found to be weak and largely ineffectual in terms of enabling
effective monitoring of target-based performance of SEP Boards and Management by Line Ministries.
These findings led to a decision to develop basic Guidelines on effective performance management of
SEPs. The Guidelines are a product of the Government of Zimbabwe, with technical support provided
by the World Bank under the ZIMREF facility.
The principal objective of these Guidelines is to assist SEPs in developing and implementing effective
performance monitoring systems as part of sound corporate governance aimed at enhancing SEP
performance and overall service delivery. As Guidelines, they are meant to give guidance in formulating
entity specific performance management systems.
7
A SEP performance management system refers to the institutions, processes, and documents (including
laws and regulations) that government uses to monitor the financial and non-financial performance
of SEPs. SEP performance management involves three key elements:
SEP Performance objectives and targets are often contained in formal documents agreed to by the
Government and the SEP. They can include both high-level statements of the SEP’s objectives and more
detailed agreements specifying annual or multi-year performance measures. High-level objectives
are often referred to as SEP mandates. The Organization for Economic Co-operation and Development
(OECD) defines SEP mandates as “simple and brief descriptions of the high-level objectives and
missions of a SEP in the long run” (OECD 2010, 19). Mandates are generally defined by the state as
owner, not by the SEP and are contained in the law establishing the SEP.
Performance indicators are measures used to communicate performance expectations and to evaluate
performance against expected results. Using these indicators, a SEP can track its results against its
targets, and quickly identify potential problems and take remedial action.
Specific performance agreements established by the government and the SEP go by different names in
different countries, often reflecting their different form or legal status. Examples include statements
of corporate intent (as in Seychelles), performance contracts, memorandums of understanding (MoUs),
business plans etc.
8
Currently there are a number of institutions which monitor the performance of SEPs. These institutions
include: Line Ministries, Ministry of Finance and Economic Development (MoFED), Office of the President
and Cabinet (OPC), State Enterprises and Parastatals Restructuring Agency (SERA), Parliament, Auditor
General, Performance Management Committee and Auditors/ Performance Review Consultancy
and Cabinet Committee on State Enterprises and Parastatals Development (CCSEP). This situation
is understandable given the complexity of the SEP sector in Zimbabwe, in terms of the number of
SEPs, spread of their legal framework, mandates, objectives (commercial and non-commercial), sizes,
operational complexity, sector, geography, etc. Monitoring of SEPs by such a large number of institutions
requires enhanced coordination and consolidation to guard against the risks of possible over-monitoring/
regulation, duplication of roles, and any monitoring gaps, while contributing to overall enhanced SEPs
performance. The monitoring roles provided by these institutions include checking compliance,¹
establishment of performance indicators, setting targets, development of performance agreements
and performance contracts, as well as tracking the performance management systems. It is against this
background, that roles and responsibilities of the different monitoring institutions are clarified as follows;
The State delegates ownership functions to OPC and Line Ministries, and consequently OPC and Line
Ministries exercise ownership functions for SEPs that fall under their purview.
In addition to Line Ministries as direct shareholders, ownership/ shareholders’ functions are also
exercised by MoFED and OPC. In some instances, Line Ministries further delegate their ownership/
shareholder functions to Special Purpose Vehicle (SPVs).
As delegated owners, Line Ministries are expected to carry out the following functions.
A To approve and monitor the development of strategic plans for SEPs under them.
B Setting annual targets for the Boards of their SEPs. (This should be done in the last quarter of
the year for the following year).
C Developing together with the Boards, the Performance Agreements/ Performance Contracts
between the Shareholders, SEPs Boards and management, by December of every year for the
following year.
D Ensuring that the Performance Agreements are signed by all parties (shareholders, the Boards
and management) by December of every year for the following year.
F Carry out Board Evaluation on an annual basis to determine the suitability of the Board and
take appropriate action where necessary and produce Boards Evaluation Reports by January,
the following year.
H To ensure the Board produces annual reports on the SEPs’ performance and table them before
Parliament, including audited financial statements.
3.1 To capture and store comprehensive corporate governance related data which should be
submitted by SEPs including:
(i) Strategic Plans and subsequent annual assessment/ evaluation/ progress reports
(ii) Signed performance Agreements/ contracts between (a) Shareholders/ Line Ministries and SEPs’
Boards (b) Boards and Chief Executive Officers (CEOs), and (c) Boards/ CEOs and Senior Management
(iii) Annual Board Evaluation reports and CEOs/ Senior Management Evaluation Reports
(v) SEPs Annual Reports and Reports of Annual General Meeting (AGM)
(vi) Disclosure of Assets Declarations by the Board members and all Senior Management
OPC should advise Line Ministries of SEPs that are not adhering to mandatory deadlines, as well as
non-submission of the required documents.
3.2 To provide a centralized support mechanism for Line Ministries, with capacity to alert Line
Ministries to any serious deviation from the requirements of good corporate governance, so
as to allow for intervention and corrective action to be taken by the Line Ministry timeously.
3.3 To establish and maintain a data-base of potential Board members willing to serve on State
Entity Boards, and to assist Line Ministries in identifying competent and qualified individuals
to serve on SEP Boards.
3.4 To coordinate the provision of comprehensive Board induction programs, and corporate
governance training for Boards and Executive Management of State Entities.
(vi) Producing, monitoring and evaluating reports, and submitting to shareholders a month after
monitoring and evaluation.
(vii) Set up board responsibility to oversee the implementation of the performance management
system. This can be a standalone Board committee or an added responsibility to an appropriate,
existing Board committee.
11
The Accountant General’s Department is responsible for the management of, custody and safety of
public resources as enunciated in the Public Finance Management Act (PFMA) through;
(i) Monitoring the financial performance of Public Entities through financial performance reviews.
(ii) Analyzing Public Entities’ quarterly and annual financial statements for senior management.
(iii) Monitoring and reviewing the financial affairs and budgets of Public Entities: through the
analysis of annual budgets that require Treasury concurrence and approval, and make
recommendations to the Minister in line with the provisions of Section 47 of the PFM Act
and other enabling Statutes.
(iv) Identifying problems of public enterprises in producing their financial statements and
budgets, and where necessary, provide advice.
(v) Reviewing Public Entities, Financial Policies and Guidelines to enhance transparency and
accountability.
(vi) Analyzing borrowing powers for Public Entities and Local Authorities.
(vii) Providing technical assistance to all Ministries, SEPs and Local Authorities.
(ix) Participating in Public Entities restructuring reforms in line with the Cabinet committee on
Parastatal Development.
SERA is a semi-autonomous agency that was initially established as the Privatization Agency of
Zimbabwe (PAZ) in 2000, under the Office of the President and Cabinet. It was later transformed to
the current SERA in 2005, when its mandate was broadened from mere privatization to also look into
other SEP reform strategies. It falls under the purview of the MoFED. Its functions are to;
(i) Assist in coordinating and managing the commercialization, privatization and restructuring
process of SEPs;
(ii) Advise Line Ministries on all matters relating to the reform process and to assist in the financial
restructuring of SEPs earmarked for commercialization, privatization and restructuring;
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(iii) Provide legal advice on legislative changes to be effected in order to speed up the reform process;
(iv) Assist SEPs in the preparation of Business Plans, Strategic Plans and Turnaround Strategic documents;
(vii) Prepare in consultation with Line Ministries, a Memorandum, including detailed work plans
and timetables for the commercialization, privatization and restructuring of SEPs;
(viii) Assist Line Ministries and the relevant SEPs in the identification of local and/or external
consultants (accountants, valuators, management and marketing specialists, etc.) to be engaged
to undertake technical aspects of the commercialization, privatization and other restructuring
strategies of SEPs;
(ix) Assist SEPs with technical advice in preparation and approval process of Public-Private-
Partnerships (PPPs) projects;
(x) Undertake the preparation and implementation of a public information campaign relating to
the benefits of commercialization, privatization and other restructuring strategies including
the anticipated empowerment benefits for indigenous Zimbabweans;
(xii) Undertake post commercialization, privatization and restructuring evaluation exercise of SEPs.
To review all aspects of the operations of SEPs in the economy with a view to recommending measures
that enhance viability and the attainment of turnaround objectives.
(a) Shall, on behalf of the House of Assembly, audit the accounts of any public entity, or designated
corporate body;
(b) May carry out examinations into the economy, efficiency and effectiveness with which any
Ministry, public entity, local authority, designated corporate body, statutory fund or other body
has used public resources in discharging its functions.
13
Parliament, through the Public Accounts Committee (a post-audit committee) examines audited reports
of various state institutions including SEPs.
To further clarify the roles played by the various performance monitoring agencies in setting targets,
it is also important to clarify reporting lines among the various players in the process of monitoring
State Enterprises and Parastatals’ performance.
The reporting structure/ lines for the various players should be as follows:
1 (a) The Shareholder/ Line Minister reports to His Excellency, the President of the Republic of Zimbabwe.
(b) Administratively, the Line Minister relates/ reports to the Minister responsible for the
Public Entities Corporate Governance (PECG) – Office of the President and Cabinet.
(c) The Line Minister tables a Report on State Enterprises and Parastatals’ performance to
Parliament, once every year.
(d) The Line Minister reports on State Enterprises and Parastatals’ performance to Cabinet,
on a regular basis.
2 The Board reports to the Shareholder/ Line Minister through the Board Chairman.
2.2 (a) Chief Executive Officer reports to the Board through the Board Chairman.
(b) Administratively, the Chief Executive Officer reports to the Line Ministry through the
Permanent Secretary and Senior Management who reports to the Chief Executive Officer.
3 Head of Internal Audit reports functionally, to the Board through the Audit Committee,
and, administratively, to the Chief Executive Officer.
4 The Head of Corporate Governance Unit in the Office of the President and Cabinet liaises
with the Permanent Secretaries of Line Ministries, as and when necessary.
14
5 SERA reports to the Ministry of Finance and Economic Development, through the
Permanent Secretary, and shall be engaged by State Enterprises and Parastatals for
restructuring technical advice, through the Line Ministries.
6 The Auditor General reports to Line Ministers, Office of the President and Cabinet, and
Ministry of Finance and Economic Development. The Auditor General tables to Parliament
the reports on State Enterprises and Parastatals’ performance.
These Guidelines are part of the SEPs reform program aimed at enhancing SEPs performance in
Zimbabwe. They are aimed at assisting SEPs in complying with the Public Entities Corporate Governance
Act. The Guidelines are also intended for use by the OPC, Line Ministries, MoFED and SERA in the
execution of their monitoring and oversight functions over SEPs. Other users of the Guidelines include
SEPs stakeholders.
Sources
It is with great appreciation that these Guidelines borrow from various sources including;
These Guidelines were drafted as part of the Capital Budget project under ZIMREF implemented by
the World Bank. The Guidelines benefited from inputs from OPC, MoFED, and SERA. The World Bank
team comprised of Henri Fortin(Global Lead, Corporate Governance and Financial Reporting), Gael
Raballand (Lead Public Sector Specialist), MacDonald Nyazvigo (Senior Finance Assistant), Peter Rundell
(consultant), Nikeisha Russell (consultant), Sonny Mabheju (consultant and main author), and received
technical advice from Pascal Frerejacque (Senior Operations Officer).
CHAPTER 1
Rationale for Establishing A
Performance Management
System for SEPs
17
International Context
The paragraphs below demonstrate examples of the impacts of good governance practices (including
performance management systems) on SOEs in various jurisdictions.
There is evidence of improved SEP performance in many countries globally in the recent past. This
has been attributed to factors such as; budgetary and fiscal reforms, restructuring measures, improved
governance practices (including performance management), exposure to greater competition and
capital market discipline.
In China, SEPs profitability has increased since the expansion of competition, corporatization,
and the creation in 2003 of the State-Owned Assets Supervision and Administration
Commission to exercise authority over state enterprises. (World Bank and Development
Research Center 2013).
In India, the 24 largest non-financial SEPs generated a 17% return on equity in 2010, and
profits almost doubled in the five years to 2014.
In the Middle East and North Africa, many countries in the Persian Gulf have created
profitable and well-run SEPs in strategic industries. These include the Saudi Basic Industries
Corporation, Emirates Airlines, Dubal, and Etisalat, all of which have made their mark at
home and abroad (Hertog 2010; OECD 2012).
Source: Developed from Corporate Governance of State -Owned Enterprises; A Toolkit-World Bank
18
SEP performance has however generally lagged behind the private sector and has not been uniformly
positive. Even those SEPs that are performing well often lag behind their private sector comparators in
integrated performance. High performance is not evenly distributed over the SEPs. High performance
is usually limited to a few SEPs that have advantages in; competition, access to cheaper capital and
other input resources. Compared to the private sector, many state-owned banks suffer from a number
of vulnerabilities, including weak balance sheets and low capitalization, relatively low profitability,
and high non-performing loans.
Box 2: SEPs performing well tend to lag behind private sector comparators
In China, non-state firms had an average return on equity 9.9% higher than that of SEPs in
2009 (World Bank and Development Research Center 2013).
In Vietnam, although SEPs registered healthy returns on equity (17%), their returns were
well below the returns of foreign firms (27%). Rapid growth in the capital and fixed-asset
base of SEPs has not been accompanied by higher productivity: in 2009, the average ratio
of turnover to capital was 1.1 for SEPs but 21.0 for all enterprises; the ratio of turnover to
employees was 1.7 for SEPs and 16.3 for all enterprises; and the ratio of turnover to fixed
assets fell for SEPs between 2000 and 2008, while remaining unchanged for all enterprises
(World Bank 2011).
In Malaysia, a 2008 study showed that government-linked companies tend to score lower
than private sector companies on metrics of economic performance or economic value
added (measured as the difference between cash flow returns on investment and the
weighted average cost of capital) (Issham et al. 2008).
A study of nine Middle Eastern countries found that state-owned banks have much lower
profitability than private banks due to their large holdings of government securities, larger
ratios of overhead costs to assets (because of much larger ratios of employment to assets),
and higher ratios of loan-loss provisions to outstanding loans (reflecting much larger shares
of nonperforming loans in their portfolios) (Rocha 2011).
Although there are exceptions, SEPs tend to perform particularly poorly in low-income
countries. A study in Burkina Faso, Mali, and Mauritania found that of the 12 SEPs that
provided information, 8 reported losses while 3 were operating at close to breakeven. Only
one reported significant profits: Mauritania’s Société Nationale Industrielle et Minière, a
mining company (Bouri, Nankobogo, and Frederick 2010).
Poor performance by SEPs can negatively impact national competitiveness and growth. In
many countries, SEPs continue to crowd out or stifle the private sector, while lack of competitive
markets or a level playing field creates inefficiencies and limits the expansion of the private sector.
Numerous surveys and studies show that the shortage of key infrastructure capacities, due in part
to SEP inefficiencies and underinvestment is ranked as one of the top three constraints on country
competitiveness and growth. This is particularly so in Zimbabwe with regards to electricity, water
and transportation infrastructure. Achieving higher levels of economic activity will therefore require
substantial improvements in the performance of existing infrastructure SEPs, along with private
sector investments and public-private partnerships.
Loss-making and ineffective financial services SEPs weaken the financial system in a country.
By lending to unprofitable SEPs, financial services SEPs can create contingent liabilities that become
a source of fiscal risk. By underpricing and engaging in business practices that displace commercial
financial services of the private sector, financial SEPs hinder new private entry and undermine
competition, which in turn retard financial market development, diminish access to financial services,
and weaken the stability of the financial system (Scott 2007). Financial SEPs, particularly in some
emerging markets provide significant amount of financing to unviable SEPs and weak institutions.
This can harm economic growth, competitiveness and erode public trust.
There is increasing realization of the impact of poor corporate governance on the performance of
SEPs. Although underperformance of SEPs is a symptom of a number of underlying problems including;
external factors, such as shifts in commodity prices and sector-specific factors, such as public service
obligations and regulated prices, there is increasing recognition that poor corporate governance of
SEPs is at the heart of the underperformance problem.
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Zimbabwe Context
The paragraphs below demonstrate the importance of good SEPs performance to the Government of
Zimbabwe and some of the challenges SEPs in Zimbabwe face.
Performance of SEPs is at the core of Government reforms in Zimbabwe. This is evidenced by the
following quote from the 2017 Budget Speech by the Minister of Finance and Economic Development,
Hon. Patrick Chinamasa;
10. Consequently, this Budget, therefore, proposes corrective measures on fiscal and external
imbalances to restore fiscal and debt sustainability, which provides a conducive environment
for productive activities.
11. Specifically, while as alluded to above, fiscal imbalances will require containment of
expenditures, implementation of strong structural reforms will entail:
shedding off those State Enterprises that would benefit from joint venture partnerships
with identified strategic investors;
improving performance of those State Enterprises that remain;
reducing policy uncertainty;
fighting corruption in an effective way;
enhancing competitiveness;
enforcing guidelines on good corporate governance in public enterprises and local
authorities; and
building strong systems for ensuring transparency and accountability.”
Zimbabwe SEPs face many performance challenges. The SEPs face challenges in improving
performance including those tabled below.
21
Challenge Description
Inadequate capitalization SEPs largely rely on depressed revenue (due to the state of the economy),
debt and other sources of finance including government transfers to fund
basic operations. When the country adopted a multicurrency regime in 2009
with the US$ as the main functional currency, most SEPs started with very
low capital bases and few have been able to raise capital from the markets.
The government had no resources to capitalize these SEPs. This left SEPs
with inadequate funding to fund capital projects especially rehabilitation
and upgrading of infrastructure in the capital intensive sectors like utilities
and network. Examples are SEPs in the electricity, water, telecommunications,
transport sectors, etc.
Below-cost pricing/failure to Some tariff structures are kept artificially low and prevent full cost-recovery
recover costs by SEPs. Compensation from treasury may be required for non-commercial
services and this has not been forth coming in some cases because of limited
cash resources. The fact that many SEPs in Zimbabwe are established and
operated with both commercial and non-commercial objectives compounds
this problem.
Current activities are no longer Activities in some commercial SEPs are remnants of initial investment decisions
supportive of the original which have been overtaken by events over the years, a result of lack of ability to
mandates of the SEPs because of adjust to changing situations and circumstances. Mandates have changed over
changed/ additional mandates time in for example; urban transport, grain management and business models
or Government directives have not responded appropriately to the changes in mandates.
Failure to collect money for Failure to collect on services provided has led to under-funding in some SEPs.
services rendered
Inadequate reporting and Inadequate reporting and monitoring is common and does not allow for
monitoring systems the transparency, accountability and governance requirements for SEPs. It
further does not help early exposure of situations where SEPs may be over
or under financed, and it ultimately shields SEPs from misuse of public funds,
corruption, and from disclosing inefficiencies where they exist.
Ineffective boards Most SEP boards require enhanced professionalization, improved composition
and structure, and shielding from any unwarranted external interference in
order to enhance their effectiveness. This is dealt with in more detail, in the
manual on Enhancing Board Effectiveness.
Source: Developed from the findings of the assessment of corporate governance practices in 39 SEPs selected by the Government.
These guidelines address the elements necessary to enhance SEP performance through sound
performance management systems.
22
CHAPTER 2
Establishing SEP
Performance Indicators
and Setting Targets
Linked to Strategy
23
Performance indicators; are the complete set of measures reflecting the SEP’s underlying value drivers.
They are derived from the SEP’s strategy. They assist in diagnosing areas requiring improvement. The
performance indicators are set by the Line Ministry board and management, preferably following
a “bottom-up” and a “top-down” approach. They are reported on by the board to the Line Ministry.
Entity Key Performance Indicators/CEO KPIs-(KPIs): these are a subset of performance indicators
described above. They focus on key performance of the entity. They demonstrate how effectively
the entity and the CEO are performing in achieving key organizational objectives. They are ideal for
benchmarking and can be used to show how the organization is performing against goals, previous
performance and competition. They are also used to determine reward and consequences. Entity KPIs
and CEO KPIs are the same to ensure the required goal congruence between the CEO and the SEP.
They are set by the board and the CEO, who reports on them to the board.
Business/Division Unit KPIs equate to relevant business/division management KPIs and cascade from
Entity/CEO KPIs. These are set by the Board and CEO, with inputs from business/division management
and reported on by the CEO to the Board.
24
SEP Strategy
Performance Indicators
The following requirements and guidelines assist in designing high quality effective performance
indicators and setting targets for SEPs:
Guideline 1
Design a set of relevant performance indicators directly derived from the entity’s mandate, strategy
and objectives (i.e. linked to the entity’s value drivers). Dimensions for performance indicators should
include financial, customer related, operational, and organizational measures.
25
Description
• Performance indicators must be linked to the entity’s strategy and objectives. They must:
Measure both direct shareholder and stakeholder value creation and any other concrete social/
developmental objectives of the entity as reflected in its mandate.
Be high quality and therefore; balanced, complete and comprehensive addressing both financial
and non-financial performance of the entity.
In aggregate, all the indicators must reflect the overall priorities of the entity as reflected in
its objectives.
• Characteristics of good, effective, high quality SEP performance indicators are that they should
involve legal issues, strategy, objectives, incentives, benchmarking, management performance,
tracking and audit: They should therefore:²
Not violate Zimbabwe laws, standards and codes influencing the SEP, and should encourage
and reflect international good practice;
Be well defined and clear, avoiding or reducing subjectivity. For example, indices and surveys
might be used to quantify subjective measures;
Ideally, measure outcomes rather than inputs. Clear links to value creation should be defined
when an input indicator is selected;
Be linked to SEP strategy and objectives. The combination of all the indicators should reflect
the overall priorities in the objectives;
Be Challenging, Specific (to the entity), Measurable (the indicator can be quantified in a
meaningful and realistic way), Achievable (given the prevailing environment and available
resources), Results –oriented, and Time based;
Be based on objectives that SEP management can actually control and be held accountable for;
Aim for goal congruence between senior management and the SEP objectives;
² Adapted from Corporate Governance of State Owned Enterprises: A Toolkit- World Bank Group.
26
Be based on assumptions that are clear and allow for revision of targets if the assumptions
change because of factors beyond management control;
Be linked to management performance indicators. The same indicators used to evaluate the SEP
must also be used to evaluate management, and management compensation must be linked
in part to performance;
Indicators must initially be simple and enhanced over time as experience and capacity increase.
• Performance indicators should be cascaded down to lower levels of the organization (e.g. to each
business unit or department). Conversely the lower level performance indicators should aggregate
to the performance indicators at the entity-level.
Guideline 2
Apply careful judgment to set targets that are stretch and achievable.
Description
• Upfront in the budgeting cycle, the Board should clearly state its expectations on the targets for
the entity. This should be informed by advice that is independent of management.
• Targets must be stretch and informed by benchmarking against industry peers (both domestic and
international). Peer entities are entities in the same industry, of similar size and subject to similar
complexity and risk. The Board should approve the selection of the appropriate benchmarks.
Because SEPs often operate as monopolies or in non-traded sectors, they may not have domestic
comparators. Any comparisons should be interpreted with care.
• Ensure targets are challenging but achievable, based on; bottom-up estimates from senior
management, extrapolating historical performance, and an assessment of internal capabilities.
Unachievable targets may lead to reporting fraud, management gaming results, and other
unintended consequences.
• Targets should be agreed upon between the Board and the CEO before the beginning of the
financial year.
27
• Targets should be explicit about critical assumptions made in setting them. This allows for
appropriate revision when the assumptions change significantly because of factors beyond the
control of the entity’s management. At the same time, the indicators must be robust enough to
allow for normal dynamics in the business environment and permit realistic flexibility.
• Indicators should be capable of tracking by appropriate information systems. To the extent possible,
indicator measurements must be obtained directly from the entity’s information systems with no
additional adjustments needed, and minimum human interface.
• Performance of management should be evaluated against indicators. The same indicators used
to evaluate the entity must be used to evaluate management, - and management compensation
should be partly linked to performance.
• The quality of any indicator depends on its accuracy and reliability. Performance indicators must
therefore be subjected to external audit or assurance.
• Indicators should be enhanced overtime, starting simple with basic financial and economic, social
and governance (non-financial) indicators which are improved over time as experience and capacity
increase. The Line Ministry should regularly review the relevance of the performance indicators
to ensure they remain relevant.
Guideline 3
Allow revision of targets for cases where the external environment has fundamentally changed.
Description
Performance has deviated from targets because factors outside management control have
significantly changed the assumptions behind the targets; and
Management for reasons beyond its control, could not, and is unable to take corrective action.
• In all cases, Board approval is required to revise targets during the year should the need arise.
28
Financial indicators are the traditional measures of entity performance. They are based on standard
information contained in the financial statements or readily available. They fall into the following
broad categories;³
• Profitability indicators, including profits, sales/revenue, and whether profits are returned to owners
through dividends or value creation. The choice of indicators is unique to every industry, sector,
and SEP, but typically include:
Revenues, a measure of how much the entity has generated through sales in a period, taken
directly from the income statement. Revenue growth is a good sign for the entity.
Return on assets, net income divided by total assets. Return on assets is a measure of the entity’s
effectiveness in using its assets. This ratio is best benchmarked against other entities in the
same sector adjusted for different levels of debt.
Return on invested capital, net income minus dividends, divided by total capital. Return on
invested capital is a measure of the entity’s ability to allocate its capital into profitable
investments that produce returns.
Economic value added, a measure of profit that takes into account the costs of capital. This ratio
is not commonly used.
• Efficiency indicators measure the efficiency of the entity and how well it uses the resources at its
disposal. These indicators might include the return on assets or equity (described above) along
with direct efficiency measures such as the ratio of the costs of production to sales.
• Liquidity ratios; measure the entity’s ability to pay off its short-term obligations. This is done by
comparing liquid assets or those that can easily be converted to cash with its short term liabilities.
The ratios include; current ratio, quick ratio, cash ratio, and cash conversion cycle.
³ Adapted fromCorporate Governance of State –Owned Enterprises: A Toolkit- World Bank Group.
29
• Solvency indicators measure the entity’s borrowing, its indebtedness, and its ability to service its
debt. These indicators include;
Debt-equity ratio;
Liquidity ratio;
Asset-liability ratio;
Non-performing loans;
Capital adequacy ratio; is relevant only for financial institutions (prudential concept);
• Budgetary appropriations indicators cover transactions that relate to government transfers to the
entity to cover the entity’s losses or subsidize its operations.
A detailed list of Financial KPIs explaining each KPI and giving guidance on how each is calculated is
available in Annex 1.
SEPs KPIs can be structured along the 3 Pillar dimension of ESG or non-financial indicators (simply
referred to ESG KPIs hereafter). Many countries are adding corporate governance indicators to
their broader non-financial performance indicators for SEPs,⁴ hence the term economic, social and
governance indicators. In practice, a 4th Pillar; “long term viability” is added to capture those KPIs
that depict sustainability. It is therefore common for SEP performance management to go beyond
financial indicators and look at specific ESG aspects of the SEP operations. ESG KPIs provide a
broader perspective on an entity’s performance. They offer the following potential advantages over
measurement systems based on financial data alone;⁵
• They tend to be forward looking. ESG performance measures tend to act as leading indicators.
By contrast, financial indicators are generally lagging indicators of enterprise performance,
reporting the historical performance of an enterprise but offering much less value as predictors
of future performance.
⁴ The Zimbabwe Constitution requires SEPs to comply with generally accepted corporate governance practices. The National Code
on Corporate Governance Zimbabwe was adopted for all entities in Zimbabwe and the Public Entities Corporate Governance
Bill is in the final stages of enactment into law.
⁵ Adapted from Ittner and Larcker 2000.
30
• They tend to be more closely linked to enterprise strategy. Financial reporting focuses on periodic
performance against accounting benchmarks. It does not assess progress toward strategic goals
relating to such issues as economic competitiveness, quality and spread of services, environment, etc.
• They tend to capture intangible success factors. Critics of traditional measures argue that it is the
“intangible assets” such as customer loyalty and service, not the balance sheet that drive success
in many industries. Ignoring intangible assets can lead managers to make bad decisions.
• They tend to offer better management incentives. Many aspects of an enterprise’s financial performance
are outside the control of management. ESG indicators allow the board to target specific behaviors
by management of that which it wants to encourage.
ESG performance indicators should generally reflect all important objectives in an entity’s strategy.
The objectives (and thus the indicators) should be specific to the sector in which the entity operates.
Industry groups and development organizations have identified a range of indicators that measure
operational performance in key sectors. One example is the water sector, for which the International
Benchmarking Network for Water and Sanitation Utilities, has developed indicators covering service
coverage, consumption and production, metering practices, efficiency (non-revenue water), staffing,
and quality. (Refer Table4)
While there are advantages to having ESG performance indicators, there are potential challenges as
well. Ittner and Larcker (2000) identify five limitations:
significant time and cost involved in developing and evaluating a large number of indicators;
lack of a common denominator in measuring ESG data, which leads to subjective assessments
and makes evaluating performance difficult;
adoption of incorrect ESG measures with no clear bearing on financial performance, which can
focus attention on the wrong objectives;
dilution or “disintegration” of the measurement process when too many measures are chosen.
Ittner and Larcker (2000) highlight three steps that can be taken to select and implement
appropriate measures:
understand and identify the entity’s value drivers based on its strategy and objectives;
document, review, and choose measures ensuring consistency and alignment with the entity’s
objectives and strategies, value drivers, and competitive environment; and
incorporate the measures as an integral part of the entity’s reporting and performance evaluation
to create employee incentives and influence performance.
31
It is important to ensure that ESG indicators do not lead to unintended consequences whereby achieving
the objectives of the ESG indicators creates another problem working against the overall strategic
objectives of the SEP. Care should also be taken to ensure ESG indicators do not give rise to or encourage,a
silo performance culture which does not take into account enterprise wide and cross-cutting issues
necessary to achieve the SEP’s strategic objectives.
Environmental management is particularly relevant for SEPs that use a lot of natural resources as input
to their processes; particularly those in the extractive industries. Sound environmental management
such as managing water, waste and energy can contain costs, and enable SEPs to maintain margins
despite slumps in revenue. For example, innovative lean production methods, can contribute to better
than expected results and stable margins despite relatively flat top line growth. Key indicators include:
Social Indicators
Human rights indicators: Human rights are particularly relevant in companies with large supply chains
using a lot of human capital such as retailers and consumer product producers, as well as in SEPs with
significant footprint on the local community such as agriculture and extractive SEPs.
Child labor (particularly in agriculture), unfair living wages and inappropriate regard to the community
in which the SEPs operate, tend to be major issues. Key indicators include:
Labour relations: labor relations are particularly relevant in extractive industries, SEPs with history of
governmental influence such as telecommunications, transport, and for boards that have a focus on
innovation, Research & Development and need highly skilled labour.
Good health and safety practices and strong employee training programs improve productivity and
employee retention. For example, targeted training programs can contribute to growth in sales per
employee workforce hour. Poor health and safety practices can result in fines and production disruption.
Similarly, industrial action can lead to prolonged disruption to operations. Key indicators include:
32
Staff turnover;
Absenteeism.
Governance
Good governance is relevant across sectors in which SEPs operate, and it is a constitutional and legal
requirement for public entities in Zimbabwe. Key indicators include:
The existence of appropriate internal controls through an audit system, with board level oversight;
Remuneration incentives and its implication for risk taking/appropriate inclusion of ESG elements;
Innovation in SEPs should be a core area of focus especially those in sectors affected by technology
changes, and those that need to adapt to climate change, devise methods of greater food production,
devise new methods of transportation, manufacturing etc. Innovation in all these areas is relevant in a
world of increasing resource scarcity, global & local competition and changing operating environments.
Key indicators include:
4 Core competencies
5 Internal recognition
6 Morale
Goal Achievement
1 Productivity
2 Environmental compliance
3 Strategic achievement
Service coverage - Coverage is a key development Water coverage - Population with access to
indicator. All coverage indicators are affected by water services (with a direct service connection
whether the data on population and household or within reach of a public water point) as %
size are up to date and accurate. of total population under utility’s nominal
responsibility.
Non-revenue water - Water that has been Non-revenue water - Difference between water
produced and is “lost” before it reaches the supplied and water sold (volume of water
customer (through leaks, theft, or legal use for “lost”) as % of net water supplied.
which no payment is made). Part of this “lost” Non-revenue water - Volume of water “lost”
water can be retrieved. per km of water distribution network per day
(m3/km/day).
Network performance - The number of pipe Pipe breaks - Total number of pipe breaks per
breaks, relative to the scale of the system, is a year per km of water distribution network.
measure of the ability of the pipe network to
provide a service to customers. The rate of pipe
breaks can also be seen as a reflection of the
general state of the network, and it also reflects
operation and maintenance practices.
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Cost and staffing - Unit operational costs Unit operational costs - Annual water service
provide a “bottom line” assessment of the operational expenses/total annual volume sold
mix of resources used to achieve the outputs ($/m3 sold).
required. The preferred denominator for Staff costs - Number of staff per thousand water
operational costs is the amount of water sold. connections.
This ratio reflects the cost of providing water Staff costs - Number of staff per thousand
at the customer off-take point. people served.
Labor costs - relative to operational costs. Total
annual labor costs (including benefits) as % of
total annual operational costs.
Electrical energy costs - as % of operational costs.
Contracted-out service costs as % of
operational costs.
Quality - Complaints, while relatively easy Continuity of service - Average hours of service
to track, give only a glimpse of actual entity per day for water supply.
performance; consumers may have become Quality of water supplied - Number of tests for
accustomed to poor service and may not residual chlorine.
complain. In other cases, it may be difficult for Quality of water supplied - Samples passing
customers to report complaints. Capturing at on residual chlorine (%).
least some customer-derived data is important. Complaints - Total number of complaints
per year as %of total number of water and
wastewater connections.
Financial
Revenue - Billing customers and getting paid Total annual operating revenue - per volume of
are two different things. The effectiveness of water sold ($/m3 water sold) or per connection.
the collections process is measured by the Collection period - Year-end accounts
outstanding revenue at year-end compared receivable/total annual operating revenues.
with the total billed revenue for the year, in day Collection ratio - Cash income as % of billed
equivalents, and by the total amount collected revenue.
as a percentage of the billed amount.
Assets - The capital intensity of the utility is Gross fixed assets - Total gross fixed assets per
indicated by the gross fixed-asset value per population served ($/population served).
capita served.
Source: Adapted from the International Benchmarking Network for Water and Sanitation Utilities indicators
36
All organizations depend on various forms of capital for their success. The 6 <IR> framework capitals
are; (1) financial, (2) manufactured, (3) intellectual, (4) human, (5) social & relationship, and (6) natural.
The capitals are stocks of value that increase, decrease, or transform through the activities of the
organization. For example, the organization’s financial capital increases when it makes a profit. Human
capital increases when employees are trained but the training costs decrease financial capital i.e.
financial capital is transformed into human capital. This demonstrates in a simple way, the interactions
and transformation between the organization’s capitals.
Many activities cause increases, decreases or transformations that are far more complex than the
above example and involve a broader mix of capitals or of components within a capita (e.g. the use
of water to grow crops that are fed to farm animals, all of which are components of natural capital).
An integrated report should tell to what extent the organization achieved its strategic objectives and
the outcomes in terms of each of the organization’s capitals.
An Integrated report contains quantitative and qualitative information about the organization’s
performance, for example;
• Qualitative indicators with respect to targets, risks and opportunities explaining their significance
and implications;
• The organization’s effects (both positive and negative on its capitals throughout the value chain;
• State of relationships with key stakeholders and how the organization has responded to
shareholders’ legitimate needs and expectations;
• The linkages between past and current performance and between current performance and the outlook.
KPIs that combine financial measures with other components (e.g. the ratio of land degradation to sales)
or narrative that explains the financial implications of significant effects on other capitals and other causal
relationships (e.g. expected revenue growth resulting from efforts to enhance human capital) may be used
to demonstrate the connectivity of financial performance, with performance regarding other capitals. In
some cases, this may involve monetizing certain effects on the capitals e.g. impact of land degradation,
water use etc. on natural capital).
It is also relevant to include in the performance discussion, the impact of regulation on performance,
e.g. regulation of tariffs on the provision of services like water, electricity, urban routes bus fares etc. and
quantify their impact on revenues and reported performance indicators.
Social & relationship The institutions and the relationships within and between
communities, groups of stakeholders and other networks,
and the ability to share information to enhance individual
and collective wellbeing. Social and relationship capital
includes shared norms, common values and behaviors, key
stakeholder relationships, and the trust and willingness to
engage, that an organization has developed and strives
to build and protect with external stakeholders. Also,
intangibles associated with the brand and reputation that
an organization has developed. An organization’s social or
regulatory license to operate.
Source: Integrated Thinking and Reporting- Focusing on Value Creation in the Public Sector; CIPFA and World Bank
<IR> is an evolving reporting framework and the National Code on Corporate Governance of Zimbabwe
requires boards to “formally adopt a suitable reporting framework for use by management in integrated
and sustainability reporting”. However, it is worth taking note that; “<IR> is a journey and it will take
more than one reporting cycle to get there.” Appropriate <IR> KPIs should be used from reported <IR>
information as entities progressively implement <IR> over time.
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Identifying performance indicators which are linked to strategy is an effective way to align top management
and drive overall performance.
1 Designing the right performance indicators for a SEP is a demanding process that requires a good
understanding of the business of the SEP. It can however be simplified by splitting it into 3 steps:
(i) Define a clear strategy for the SEP;
(ii) Derive performance indicators from the strategy - (these are the value drivers for the SEP);
(iii) Translate and measure the performance indicators at all levels of the SEP;
2 Monitoring and tracking performance indicators at all levels of the SEP to identify any
deviations and taking early action is vital;
3 Indicators should comprise both backward looking indicators (to take stock of the SEP’s
performance to date and forward looking to assess mid to long-term sustainability. The table
below demonstrates this for an industrial SEP.
Source: Adapted from; The Blue Book; Intensifying Performance Management in Government Linked Companies-Malaysia
Issues: Profit erosion signs are visible as a result of increased sector competition and more stringent
regulatory regime. Shareholder returns are declining.
Analysis: This identified a number of sustainability problems including: the banks’ customer satisfaction
which was falling against competition; bank’s brand rating was amongst the worst 5; cost-to-income ratio
was higher than for competitors; and productivity was low and declining,
The analysis identified crucial strategic/performance issues to be addressed in order to achieve the
strategic objectives.
41
Source: Adapted from; The Blue Book; Intensifying Performance Management in Government Linked Companies-Malaysia
42
Issues: Drop in global commodity prices, regulatory changes, and decline in demand, left the SEP without
a viable long term strategy
Analysis: A situation analysis of the company revealed; higher product costs than competition, decreasing
mineral quality, decreasing global prices, aged assets with high maintenance costs, and increasing problems
with unions on remuneration issues.
The strategic objectives of the company required the introduction of certain performance indicators to achieve them.
Source: Adapted from; The Blue Book; Intensifying Performance Management in Government Linked Companies-Malaysia
43
Best practice in setting targets for performance indicators is based first on an initial “bottom-up”
approach for collection of relevant information, where all business units provide inputs on the targets
at the start of the process some months before the beginning of the year. The information gathering
is followed by a “top down” process of setting targets.
The advantage of this approach is that all stakeholders have an opportunity to provide inputs and
to sign off on the final targets. This embeds in the system the needed consensus on the targets. It
ensures that realistic targets are set, and all staff is well informed on the targets.
To ensure minimum adjustments of performance indicators and targets during the benchmarking
and evaluation processes, it is important to ensure that all variables are right and the operating
environment for the entity is both conducive and appropriate before implementing performance
management systems. Otherwise the effectiveness of the performance management systems will
be compromised by possible gaming and/or requests for adjustments of targets from management
during the benchmarking and evaluation processes to take into account factors claimed to be beyond
management control.
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CHAPTER 3
Establishing and
Review of KPIs
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The rationale for designing KPIs is to ensure alignment of effort of people in the SEP to the overall
goals of the SEP. This is achieved by;
• Instilling a culture of accountability for results and outcomes in all employees; and
Individual performance monitoring and assessment for the CEO and senior management in an entity
is done by benchmarking actual performance against entity KPIs. Properly designed KPIs align desired
management behaviors and performance with the entity’s strategy and objectives.
Implementation of a performance management system will be guided by each SEP’s strategic plan which
indicates key results areas to be achieved within a given period. These specific targets will then be agreed
upon between the SEP and responsible oversight institution for that SEP to form the basis upon which
performance will be monitored through KPIs. The strategic plan will indicate areas of responsibilities
and the performance management system through the board will provide indicators which will guide
the performance contract of the CEO and senior management. The Board reports the CEO’s performance
results to the oversight institution for the SEP
while, the CEO reports the performance results of
key management to the Board.
Properly designed Entity KPIs (which are the same as the CEO’s
KPIs align desired KPIs), and KPIs for managers are derived from/
are a subset of the individual SEPs’ performance
management behaviors
indicators that are ultimately linked to the
and performance with SEP strategy (the value drivers of the entity).
the entity’s strategy They contribute to the overall KPIs of the SEP
but translated to specific activities within the
and objectives individual’s domain. For KPIs to be valid and
relevant, they must meet certain characteristics
and these are set out in Table 7 below.
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Characteristic Qualities
Linked to SEP strategy The measure can be aligned with a strategic objective or specific
customer value.
Controllable The results are controllable or influenced under a specific span of control.
Can be acted upon Action can be taken to improve performance on the measured dimension.
Measurable The desired performance can be quantified in a meaningful and realistic way.
Integrated The measures are holistic and compatible with related processes.
Source: The Blue Book; Intensifying Performance Management in Government Linked Companies-Malaysia
The following are some of the guidelines for designing KPIs and setting targets for senior management:
Guideline 1
Description
• Entity KPIs and KPIs for the CEO are very relevant performance indicators for the entity. KPIs
for other senior management are subset performance indicators for their respective divisions,
business units or departments.
• Best practices suggest that for clarity and focus, each senior manager should have a manageable
number of KPIs - (no more than five to eight KPIs).
• Entity KPIs and KPIs for other senior management may also include major milestones with
measurable outcomes (e.g. cost, time and impact of successful implementation, etc.).
• KPIs for senior management other than the CEO, may also include overall entity performance. KPIs
must be appropriately weighted based on their importance to the business objectives.
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Guideline 2
Description
• The CEO should agree formally with the Board on entity KPIs and targets and the Chairman should
sign-off this agreement with the CEO.
• For other senior management, apply a similar process which includes a “bottom up” process where
both the CEO and individual managers sign off.
• KPIs and targets should be agreed on and signed-off at the latest, by the first month of the financial year.
Guideline 3
Description
• Choose a performance rating scheme in line with the SEP’s culture and strategy.
• The methodology to link KPIs to individual performance ratings should be clear and announced at
the beginning of the year e.g.
Performance against entity KPIs determines ratings, rewards and consequences (commonly
known as “Absolute Rating”). The employee’s actual performance is compared with his/her
KPIs, irrespective of the performance of other people in the SEP.
Performance against peers determines rating, rewards and consequences (commonly known
as “Relative Rating”). This rating scheme is based on the relative performance of the employee
compared to that of his/her peers. Under this method, regardless of how well all business unit
managers perform, there will always be a certain number of them rated as low performers.
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Guideline 4
Description
• SEPs’ CEOs should report to stakeholders their objectives, headline performance indicators and
priorities, without revealing strategic actions to competition. They must also not conflict with
Zimbabwe laws, regulations, standards and codes.
• The headline performance indicators are a subset of the broader performance indicators. Headline
performance indicators should, where possible, include economic profit and, at least, the main
drivers of value creation (e.g. revenue growth, EBITDA, etc.)
• Headline performance indicators are a powerful tool to rally all levels of employees, by providing a
common reference point to chart progress. This is especially important where staff rewards across
all levels are linked to the headline performance indicators.
• Headline performance indicators should be announced at least annually with the year-end results,
and progress against them should be included in the quarterly reports of results.
• Many SEPs struggle to set the right targets because external factors on which the employees have
no influence, affect their ability to reach their targets. An example is that airlines might find it
difficult to set financial targets and hold the managers responsible, because fuel prices and other
events outside the managers’ control significantly impact the financial results, and hence the KPIs.
• SEPs should use appropriate mechanisms to correct the targets where uncontrollable factors
come to play e.g.;
Pre-agree on some key assumptions (e.g. fuel price for airlines) and a “deviation band”. If the
parameter deviates outside the “deviation band”, the overall SEP’s financial targets would be
revised and the financial KPI targets recalculated;
There are inherent ethical and compliance pressures associated with performance targets, which need
to be mitigated. If not mitigated they can lead to various types of fraud, including reporting fraud,
reporting results that “meet” the targets through gaming. There has to be controls to mitigate these
risks including a clear and consistent message from management demonstrating their commitment
to ethics and compliance in the face of performance targets.
The performance of the CEO and other senior management must be reviewed regularly against the KPIs
(at least annually). It is important to set the objectives of monitoring performance of CEOs, this would
include;
• Monitor the SEP’s performance. This is part of the Board’s broader role;
The CEO’s evaluation is to be done by the Board at regular intervals (every year), and communicated to
the ownership entity.
The general approach, principles, criteria and activities carried out to evaluate performance must be
clearly described.
• The principles should include: transparent framework, fairness and confidentiality of deliberations.
• Criteria should capture a broad sense of performance, not just net profits but include all the 6
capitals of<IR> as described in Chapter 3.
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Safeguards should be built in for the most “extreme” cases - e.g. possible dismissal of the CEO when
circumstances warrant. The Board should document the evaluation in reasonable detail.
It is important to clarify that total compensation includes: i) salary/emoluments, ii) benefits (medical,
school, vacation pay, sick leave etc.) and iii) performance pay (bonus, profit sharing, stock option – if
applicable). Reimbursements of out-of-pocket do not represent compensation strictly speaking (even
if paid through the payroll system).
SEPs in Zimbabwe are required to comply with the following requirements of the Government of
Zimbabwe as stated in the “Corporate Governance Principles as Approved by Cabinet on 4 March 2014”;
• CEOs and other senior management staff at Public Enterprises to be placed on performance-
related contracts;
• Performance-related contracts to clearly spell out the minimum requirements which, if not met, shall
constitute grounds for termination of service;
• Performance related contracts to clearly spell out what a CEO is entitled to as a severance package
under the different scenarios of termination of service;
• Boards to evaluate the performance of CEO’s on a quarterly basis and brief Line Ministers on the
results thereof.
The following are the requirements and guidelines for reviewing individual performance:
Guideline 1
Description
• Even though there should be a clear link between the performance of a business area and the
review of the individual leading that business area, business performance reviews should be
followed by a separate review of individual performance.
• The Board should regularly review the performance of the CEO as well as identify any issues and
recommend remedial action if required.
• The CEO should review senior management periodically (ideally once every 6 months, but at
least annually).
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• The performance review can be done by the direct superior or, preferably, an evaluation committee.
A committee comprised of the superiors’ peers will ensure sufficient calibration of reviews across
the organization (e.g. Board reviews CEO and top management; CEO and top management review
management in the second level). Guidelines Description.
• If competencies, attitudes, values and/or behaviors are included as part of the evaluation, a
360-degree review system maybe useful (i.e. feedback received from superiors, peers and
subordinates - all with exposure to the person being evaluated).
• All reviews should be followed by an extensive and open feedback discussion with the person
evaluated. This discussion should cover performance against KPIs, strengths, development actions
and overall performance rating.
Guideline 2
Description
• The individual’s performance rating should clearly link to their performance against KPIs.
• The evaluation process should rate people on a sufficiently broad scale so that a wide distribution
of ratings can be achieved.
• It is important that the performance rating shows true dispersion across each level in the organization.
Guideline 3
Description
• There should be a strong link between a person’s performance rating and any subsequent monetary
and/or non-monetary incentives/consequences, and the Board should monitor the process.
• Low performers should be initially coached to improve or moved to a new position where their
capabilities are better matched. Consistently low performers should be considered for termination.
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The performance of the entity and each division, business unit or department, must be reviewed on
a regular basis to ensure early identification of issues and opportunities, as well as to keep focus on
business priorities in order to drive overall performance improvement for the entity.
The following are the requirements and guidelines for reviewing business performance for the entity:
Guideline 1
Description
• The full Board should conduct periodical (probably quarterly) detailed reviews of entity performance
against entity KPIs.
• The output of the review should be an action plan that addresses major variances. This action
plan should form the basis for measuring progress at the next review.
Guideline 2
Conduct regular performance reviews for all divisions, business units and departments.
Description
• The CEO should review the entity KPIs with the Chairman. The CEO should then review each Division’s
performance indicators with the relevant senior manager(s) periodically (probably quarterly).
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• Performance review meetings should be held at least once every quarter. Frequency and duration
should be adjusted according to importance and complexity of the business area reviewed.
• The output of the meeting should be an action plan that addresses specific gaps and opportunities.
This action plan should form the basis for measuring progress at the next review.
Steps in
Board Review
CHAPTER 4
Structuring and Monitoring
Performance Agreements
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SEP monitoring is one of the key ownership functions of Government as owner of SEPs and performance
agreements facilitate the effective discharge of this function.
The assessment of corporate governance practices in 39 SEPs selected by the Government, conducted
by OPC, MoFED and SERA, with assistance from the World Bank in 2016, revealed that the majority of
SEPs in Zimbabwe do not have written performance agreements with the Line Ministry as the owner.
Once the entity’s mandate is agreed, Government as owner through the Line Ministry should develop
a framework for communicating the Government’s expectations of the entity’s performance to the
entity and the public. A performance agreement is used for this purpose. It describes the expectations
and specific objectives agreed between the Government and the entity’s Board. The performance
agreement typically includes the following elements:
Element Description
The SEP mandate and the scope The mandate defines the core and non-core activities of
of activities that the entity will the business that the Board is accountable for delivering.
undertake. The mandate has two benefits: it prohibits the entity from
undertaking activities that may not be in the best interests
of the shareholders and stakeholders, and also protects
the Board and management from being asked to undertake
activities that are inconsistent with the core business of
the entity.
A short description of the entity’s To understand and manage performance, each SEP needs
vision and strategy. to develop and adopt its own strategy. The performance
agreement should be based on and incorporate the
entity’s strategy.
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Element Description
A clear description and explicit This includes access, coverage, and affordability for low-
financial cost estimate of the entity’s income consumers, providing the state and the public
non-commercial objectives. with an overall understanding of the cost of meeting
social objectives. When an entity has significant policy
objectives, the Board needs to consult with the Line
Ministry or the MoFED to balance commercial and non-
commercial objectives.
Financial and non-financial Performance measures can grow over time as capacity and
performance indicators, as well experience increase.
as targets for the indicators, to
measure the performance of the
entity against its strategy.
Frequency and procedures for In addition to legal and regulatory requirements, the
reporting. performance agreement should specify the reporting
requirements and deadlines for the SEP.
A statement describing the Dividends are driven by a SEP’s capital structure, profitability,
dividend policy. cash resources, and estimate of future capital expenditure,
among other factors. In addition to the dividend policy
set by the Government for SEPs, each SEP performance
agreement should specify that policy. The Government of
Zimbabwe issued a statement of Dividend policy applicable
to all entities expected to pay dividends.
Sources: Adapted from World Bank 2014 - Corporate Governance of State Owned Enterprises … A Toolkit
Before the performance agreement is finalized, the Government as owner through the Line Ministry
and the entity’s Board must discuss it and agree on its contents. In countries where this process is fully
developed, such as India, Malaysia, and South Africa, agreements and targets are produced annually. In
many countries, the performance agreement is made public and presented to Parliament to establish
accountability links. It is crucial that the Government’s expectations of the entity be formally, clearly,
and publicly communicated. These international good practices will become mandatory in Zimbabwe,
when the Public Entities Corporate Governance Bill becomes Law.
A good performance agreement requires the Line Ministry, representing the Government as owner, to
have good knowledge of the entity’s industry based on research, experience, and discussion with the
entity. The Line Ministry should seek help from consultants or other experts as needed.
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Monitoring entity performance against the agreed entity objectives and performance targets as
set out in the performance agreement is generally done on an annual basis. However, for more
important portfolio entities, more regular monitoring (bi-annual or quarterly) should be required.
The key to implementing a periodic monitoring framework is establishing suitable performance
indicators and targets.
The monitoring process can be streamlined by requiring SEPs to provide standard-form financial and
non-financial baseline data along the lines, as collected by SERA initially with assistance from the
World Bank. This data will be in varying degrees of complexity as time progresses - from the current
simple spreadsheet-based templates to dedicated online data entry portals in future.
The data required should conform to the existing data requirements imposed on the entity, for example,
requirements should preferably align with the financial reporting framework that the entity must adopt
for its financial statements, i.e. IFRS for commercial entities.
Periodic monitoring by the Government through the Line Ministry instills a culture of accountability
with the following requirements:
• The Government as the owner should ensure that the SEP is complying with all periodic and annual
financial reporting requirements and external audits and delivering them on time.
• All variances between the actual financial and non-financial results and the agreed performance
as set out in the performance agreement should be documented and reasons explained.
• Large or unjustified variances from planned results should be reported to the Line Minister.
• Large adverse variances that are not appropriately explained should give rise to consequences
administered by the Line Ministry under the performance agreement.
• Periodic public disclosure and to the Line Ministry should be made of SEP performance, against
the agreed objectives or relevant benchmarks and should act as a strong incentive for Managers
and Boards to improve performance of the SEP.
While target setting is a “top-down” process, senior management should review and agree on individual
targets with their superiors or the board and formalize such agreement in a performance contract.
Any negotiation(s) must not affect the established KPIs and set targets, which are derived from the
SEP’s strategy.
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Performance contracts should include short-term targets, i.e. for the next 12 months and also lay
out longer-term expectations. The longer term targets should be revisited every year to ensure their
continued validity.
It is recommended that individuals and their superiors or the board sign the performance contract
before the beginning of the year of performance to facilitate monitoring during the year.
Specific goals/objectives
Personal KPIs
Financial
• Gross margin % 50 50 55
Operational
• Operational cost $/Unit 1.05 0.95 0.90
• Transport cost $/Unit 0.30 0.26 0.24
Commercial
• Market share % 20 23 25
Organizational % of employees 80 85 90
• Annual training Number 30 35 40
• Personnel hiring % above 3 60 70 75
• Employee satisfaction survey (1-5 scale: 5= very good)
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a Contracts that are not binding; Although agreements may be of a contractual nature in form
and appearance and entered in good faith by parties involved, it is common that reciprocal
commitments are not met. For example, if an entity is to fund investments from increases in
charges, government may later give policy directives not to increase charges and the entity
fails to meet the investment targets for reasons beyond management control. It will therefore
not be proper to sanction management for failing to perform on the contract.
In many cases contracts may also not explicitly show the state’s non-commercial objectives
like social employment, charges for services, grants, subsidies, access to finance and inputs
issues. The impact of these on the entity’s financial statements may not be quantified and
disclosed. If contracts ignore such specific issues and assume a standard format which lacks
detail and mutual commitment, there may be challenges in enforcing such contracts.
b Poor quality of contracts and information; Contracts may be of poor quality to enforce and
often not made public. Information on which to enforce the contract may be outdated or not
available because of failure to meet reporting deadlines. This leads to challenges in enforcing
the contracts.
c Contracts may not be flexible. Contracts may be rigid and not adapt to changing situations and
circumstances, resulting in challenges in enforcing them.
d KPIs on which the contract is based may not be realistic; there may be structural defects in the
process of establishing KPIs resulting in unrealistic KPIs. For example, there may not have
been adequate “bottom-up” processes resulting in inadequate or absence of line management
inputs into the KPIs.
The steps are designed for performance agreements between Government and SEP boards. They are
applicable to other performance agreements with minor amendments.
Step 1
Within reasonable time before the beginning of the performance agreement period, the whole
board should set aside some time (preferably a whole board meeting) to seriously consider the
present state of the SEP. Matters to be considered during the meeting include the following:
1 Have the previous year’s strategic and annual operating plans been achieved?
2 Were there any issues arising from the previous performance agreement that needed attention?
4 Are there any new internal matters that must be addressed, e.g. new or out-dated mandates,
objectives, directives, etc.?
5 Are there any new external matters that must be addressed e.g. requirements of new laws,
standards, codes, etc. Or any such that are no longer applicable?
7 Has the Line Ministry or other entity exercising ownership rights or stakeholders raised any
concerns?
8 Are there specific concerns about the performance of the SEP, Board or CEO?
Responses to the questions should provide a basis for the current draft performance
agreement outline.
Step 2
Draft a ‘board outline’ document and delegate, in writing, the performance review responsibility
to a committee of the board to develop further in consultation with the CEO.
Step 3
Create a draft performance agreement in consultation with the CEO. The Performance Agreement
should include the elements in Table 12.
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Step 4
Determine ‘good performance’.
A statement of what is considered to be good performance of the CEO should be included. This
is important if there is disagreement as to whether objectives or standards have been met. Good
performance can be determined by the delegated committee who may want to consider what
constitutes good performance according to the needs of the SEP.
Step 5
The delegated committee should confirm the policy and process by which the review will
be undertaken.
Step 6
The board has the final say on all the processes and final form and content of the
performance agreement.
Step 7
Finally, the performance agreement is ratified by the board and is used as the basis of the
next performance review.
The Government is currently in the process of developing board and senior management remuneration
guidelines. Once finalized they will be included in a stand-alone volume of guidelines and monitored
in a manner that is consistent with Government policy on the matter.
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Annex
Cash Rotation (365/cash cycle) The number of times the cash comes back to the
organization for a period of one year.
Cash Flow from Investing Activities Shows the change in an organization’s cash position
caused by investments gains or losses.
Cash Flow The total amount of money being transferred into and
out of an organization.
Cash Conversion Cycle Demonstrates the amount of time it takes for money
invested to come back to the organization in the form
of increased cash.
Accounts Payable Turnover The rate at which an organization pays off suppliers and
other expenses. Formula: (Total Supplier Purchases)/
(Average Accounts Payable) = (Accounts Payable Turnover)
#/% Invoices Past Due Invoices that remain unpaid after their due date.
Selling, General & Administrative The costs of operating an organization - including selling,
expenses general and administrative expenses
Cost Per Unit The price to produce, store, and sell one unit of a particular
product including fixed and variable costs of production.
Formula: ([Variable Cost] + [Fixed Cost]) / (Number of
Units Produced) = (Cost Per Unit)
Cost Per Hire The average cost of hiring a new employee, including
advertising fees, employee referrals, travel expenses,
relocation expenses, and recruiter costs. Formula: (New
Hire Expenses) / (Number of New Hires) = (Cost Per Hire)
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COGS (Cost of Goods Sold) Represents the cost of materials and direct labor used
to produce a good.
Average Annual Expenses to Serve This is the average amount needed to serve one customer.
One Customer Formula: (Total Expenses) / (Total Customers) = (Average
Annual Expenses to Serve One Customer)
Percentage Cost of Workforce The cost of the workforce as compared to all costs can
be measured by summing all salaries and dividing by the
total company costs within a given time period. Formula:
(Salary Costs) / (Total Company Costs) = (Percentage of
Cost of Workforce)
Healthcare Expense per The total price of health care costs divided out among
Current Employee all employees provides an understanding of the
comprehensiveness of a company’s health care plan.
Quick Ratio/Acid Test Shows the ability of an organization to meet any short-
term financial liabilities, such as upcoming bills. Formula:
([Current Assets] - [Inventories]) / (Current Liabilities) =
(Quick Ratio)
Debt to Equity Ratio Measures how an organization is funding its growth and
using shareholder investments. Formula: (Total Liabilities)
/ (Shareholders’ Equity) = (Debt to Equity Ratio)
Bad Debt Debt that is not collectible, and is often written off as
an expense.
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Return on Innovation Investment Can be calculated by looking at the revenue from new
products, or the number of new products meeting a
revenue threshold. This is typically only reviewed by
organizations that have created an innovation department
or budget.
Break Even Time The time it takes an organization to break even from its
investment in a new product or process. If the costs are
big up front, this measure can help you understand how
long it will take to recoup these expenses.
# of Key Capital Investments that Can be based on the plan for investments, or on the
Meet or Exceed ROI Expectations results of past investments. Useful for organizations that
invest in many capital projects
ROI (Return on Investment) Shows the efficiency of an investment. Formula: ([Gain from
Investment] - [Cost of Investment]) / (Cost of Investment) = (ROI)
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Operating Profit Margin Measures income after variable costs of production are
considered. Formula: (Operating Income) / (Net Sales) =
(Operating Profit Margin)
Net Profit The amount of money an organization makes after taking out
all expenses and other costs. Formula: (Income) - (Expenses)
= (Net Profit)
Gross Profit Margin The percentage of revenue that is profit after the cost of
production and sales is considered. Formula: (Gross Margin)
/ (Revenue) = (Gross Profit Margin)
Gross Profit An organization’s profit after the cost of production and sales
is considered. Formula: (Revenue) - (COGS) = (Gross Profit)
Customer Lifetime Value The net profit an organization anticipates gaining from a
customer over the entire length of a relationship helps to
determine the costs/benefits of acquisition efforts.
Customer Lifetime Value / Customer The ratio of customer lifetime value to customer acquisition
Acquisition Cost cost should ideally be greater than one, as a customer is not
profitable if the cost to acquire is greater than the profit they
will bring to a company. Formula: (Net Expected Lifetime
Profit from Customer) / (Cost to Acquire Customer)
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Human Capital Value Added (HCVA) By taking all non-employee related costs away from the
revenue and dividing the result by the number of full-
time employees, one can deduce how profitable the
average worker in an organization is. Formula: ([Revenue]
- [Non-Employee-Related Costs]) / (Number of Full-Time
Employees) = (HCVA)
Sales Forecast Accuracy The proximity of the forecasted quantity of sales to the
actual quantity of sales.
EBT (Earnings Before Taxes) Shows how much an organization has made after considering
COGS, interest, and SG&A expenses, before taxes are
subtracted. Formula: (Revenue) - (COGS) - (Interest) - (SG&A)
= (EBT)
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Average Annual Sales Volume This is the average amount of sales per customer, expressed
Per Customer in currency. Formula: (Total Sales) / (Total Customers) =
(Average Annual Sales Volume per Customer)